First of all, you must hatch your chao from it's egg.
1. Move towards one of the eggs, move until you see "Pick" in the top right-hand corner of the screen, then press and hold 'B'.
2. Write still holding 'B', press the analog stick towards any way. Your character should now be shaking the egg.
3. Wait 5-10 seconds, then lay the egg back down (Make sure you're standing still, or else you might accidentally throw it). The egg should begin to jump.
4. Make sure that you feed it a nut from a tree in the garden (Chao will be happier and less hungry).